Williams-Energy Transfer: Tangled pipes

The ownership chart that comes out of the agreed $33bn takeover of Williams by Energy Transfer is as complicated as the companies’ thousands of miles of oil and gas pipelines that snake across the US.

It helps explain why a combination that has been well-trailed, has the support of key activist shareholders, and promises to be earnings accretive fell flat. Shares in ETE and Williams both fell more than 10 per cent, worse than peers in a bad day on the market.

ETE is a master limited partnership, a structure that is exempt from income tax. It owns 100 per cent of incentive distribution rights of Energy Transfer Partners, which is separately quoted. ETP owns 100 per cent of the incentive distribution rights of Sunoco Logistics, which is separately quoted, and in Sunoco, which is separately quoted. None of these tickers is incinerated in the takeover of Williams and new layers of complexity are being created.

MLPs, which were created by US Congress in 1987 to reduce the cost of capital for energy companies, are not something that every investor can or wants to invest in. Because the partnership is not taxed, it falls on the investor to deal with a more complicated tax position.

To deal with this, ETE is creating yet another entity, a corporation called Energy Transfer Corp, which will sit at the top of the structure and Williams’ investors will have to accept its newly-minted shares as the acquisition currency. (They can choose to accept cash instead, but there is a limited pot.)

Realising that this untested paper might not be desirable, ETE is attaching a two-year guarantee: if the ETC shares trade below ETE’s, investors will get back the difference.

As usual, the US tax code has a lot to answer for providing this financial opportunity that brings up new problems which requires new solutions, all adding to this spider’s web of different corporate entities.

It brought this extraordinary statement from ETE’s chief financial officer on a call with investors: “That’s just who we are. I think from complication comes value to be honest.”

On paper, he is right. But if the market continues to discount that value, simplification will be required.

Email the Lex team at lex@ft.com